Despite last year’s blockbuster trade deficit with China, the gap between the world’s No. 1 and No. 2 economies is shrinking … ever so slightly. It’s not going to make a dent, really. But it’s a move in the right direction if you’re President Trump, who has complained about the trade deficit with China for at least a decade now. And he has made that deficit one of the reasons for hitting Chinese imports with tariffs.
The trade deficit with China fell 4.1% year over year in January to $34.5 billion, the first decline since Feb. 2017. Exports to China fell 27.5%, which was still slower than the 31.5% drop seen in the prior three months and was outweighed in dollar terms by a 9.1% drop in imports from China, representing a $1.48 billion swing in net exports against China, based on findings by Panjiva, the trade research arm of S&P Global Market Intelligence.
Panjiva’s senior analyst Chris Rogers said the decline could embolden Trump on tariffs, even as he has signalled a pause in raising them further.
Official trade data shows a 2.8% drop in the goods deficit, the main source of the trade gap. It was the third decline in the past three years, but the fastest percentage rate decline since Trump was elected.
More Talking …
Trade negotiators led by Treasury Secretary Stephen Mnuchin and Trade Representative Robert Lighthizer arrived in Beijing on Thursday to keep the progress moving on some of the key sticking points: namely intellectual property rights for the U.S. and market access for Chinese companies, especially those in the telecom systems space.
For its part, China has been opening its market to international foreign services firms. The Chiense government said it will further expand market access for securities and insurance companies, now only allowed to operate under certain licenses, Premier Li Keqiang said on Thursday.
The most substantive topics for the upcoming talks will be the precise implementation of new intellectual property protections and state support for companies in China. The most controversial will relate to enforcement of agreed-upon conditions to keep with the tariff ceasefire. President Trump has indicated he wants to leave tariffs on merchandise in place to ensure compliance, rather than putting them back in place if compliance fails.
“That’s unlikely to be acceptable to the Chinese government,” says Rogers.
China seems to be moving into an area of peaceful settlement with the U.S. on intellectual property protections. But state subsidies promises to be a more difficult workout. If China wants to be able to bid for advanced telecommunications systems contracts, like building smart grids in cities, it will have to bend mightily on the state subsidy front. As it is, China’s flagship telecommunications systems company Huawei is deemed a bad actor in the U.S. and now the U.K., making it highly improbable that the company—which rivals Cisco Systems in parts of the world and is busy building its own smartphone operating system to compete with the global dominance of Apple’s iOS and Google’s Android—would be so easily allowed into U.S. government contract bidding without making massive concessions elsewhere.
As far as the trade deficit goes, 2018 saw a record $419 billion gap with China. Most of that can be blamed on companies here frontrunning tariffs that hit $200 billion in September 2018. The U.S. trade deficit with China has been on the rise ever since its ascendance to the World Trade Organization in 2001. Back then, the deficit with China was just $83 billion.
The deficit fell only two times since from the previous year’s rise: once in 2009 due to the financial crisis and resulting recession and again in 2016, according to Census data.